Jobs report could be strong

Market looks for more growth than economists do

WASHINGTON (CBS.MW) -- The U.S. labor market, which has been healing slowly from the pain of the 2001 recession, might be on the verge of getting a lot better fast.

So far, job growth has been rather tepid, totaling 343,000 over the past four months, an average of just 86,000 a month, far short of what's need to replace the 2.7 million jobs lost since the recession began.

The Labor Department will release its estimates of job growth and the unemployment rate for December at 8:30 a.m. on Friday. Economists expect that nonfarm payrolls increased by about 138,000 while the jobless rate stayed at 5.9 percent, according to a survey conducted by CBS MarketWatch. See Economic Calendar.

In November, nonfarm payrolls grew by 57,000.

"This growth is still somewhat disappointing," said Brian Wesbury, chief economist for GKS&T in Chicago. "The question everyone is asking is when job growth will truly turn the corner."

If history is a guide, sooner or later, job growth will likely accelerate to 250,000 to 300,000 each month. That's the typical pattern after a recession, but it usually happens much quicker after the economy bottoms out.

"We have a good shot" at a blowout month, said Brian Jones, an economist for Citigroup Global Markets. Jones is forecasting job growth of 200,000 for December, which would be the best in three years.

"The labor market indicators suggest that a gain of close to 300,000 is very possible," said Tony Crescenzi, chief bond market strategist at Miller Tabak. It might not happen in December, but rest assured it will "be seen soon enough."

"We suspect the time has come," Wesbury said.

The market apparently agrees that the economists' consensus is too conservative.

Traders in the economic derivatives market run by Goldman Sachs and Deutsche Bank are betting that payrolls will rise about 181,000. The market allows traders to buy contracts based directly on the payroll report. The first auction was held Thursday afternoon, to be followed by another Friday morning to accommodate European traders.

"The markets believe there is more potential for an upside surprise," said Oliver Frankel, managing director for economic derivatives at Goldman Sachs. "The auction suggests that anything below 75,000 looks quite unlikely," and that there is a "fair probability" -- around 14 percent -- of gains above 300,000.

As determined by the auction, the odds are about 60 percent that the payroll report will beat the consensus number of around 140,000, Frankel said.

Jones, Crescenzi and Wesbury each point to the same indicators to support their arguments for a surprisingly large payroll number: falling initial and continuing claims for unemployment benefits, an increase in the help-wanted index and the incredibly strong Institute of Supply Management index, including the highest level in the employment index in four years.

Leading indicators within the jobs report also suggest a pickup in hiring. The Labor Department's own hiring diffusion index hit a three-year high in November and manufacturing overtime hours also reached a three-year high.

"All the data is going in the right direction," Jones said.

Of course, other economists look at the same evidence but draw different conclusions.

"The job market continues to improve, if only slowly," said Susan Hering, an economist for UBS. "Friday's job report for December should echo that theme with hiring of around 100,000, about in line with the (strike-adjusted) average of the last few months."

Stronger payroll reports in the next few months would do wonders for the stock market, Crescenzi said. And, he said, "President Bush is more likely to be re-elected."

One strong payroll report or two won't bother the Federal Reserve, Hering said.

"With inflation low, Fed officials have voiced considerable tolerance for solid growth," Hering said. For example, Kansas City Fed President Thomas Hoenig in a speech on Thursday predicted both payroll growth of 100,000 to 300,000 per month for the rest of the year and continued low inflation.

Eventually job growth will force the Fed to raise rates, unwinding the unusually accommodative policy that's finally revived the economy, said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

"We don't know at what level or rate of change of unemployment [the Fed] will start to feel nervous, but we think a further straight-line drop [in the unemployment rate] to 5.5 percent over the next few months simply cannot be ignored," Shepherdson said.

Rex
Nutting

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

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